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Flashcards in Interest Rates Deck (33)
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31

What are STRIPS used for?

Used to restructure an income security to virtually eliminate reinvestment risk.

32

What is reinvestment risk?

The risk that an investor will not be able to reinvest income at the same rate as the bond that paid her the interest.

33

In re Kidder Peabody Securities

Trader used accounting techniques to overvalue STRIPS. This was done by logging a reconstitution by the Treasury as a “sale.” In fact, the exchange of STRIPS for bonds (or bonds for STRIPS) between a B-D and the Fed has no economic significance.